How to ensure commercial real estate problems don’t kill your deal

By: | 1:24am EDT September 3, 2013

With a stagnant economy and cautious investors, Simon Caplan, SIOR, a principal at CRESCO Real Estate, says he’s been hearing about deals suddenly falling apart in many industries. However, if commercial real estate buyers and sellers watch for ‘deal-killing’ issues, it’s less likely to happen to them.

“Sellers have to take care of certain issues with their buildings, and buyers may need to do a little more homework before entering into contracts,” he says.

Smart Business spoke with Caplan about how to mitigate real estate problems.

When buying commercial real estate, what if a building has structural or roof issues?

For roofs, get multiple contractor quotes because you’ll get differing opinions. Also, don’t be afraid to climb on the roof yourself and inspect it with your broker.

Structural issues aren’t as obvious. Ask the seller about the building’s history; they must disclose structural issues and prior repairs. Current or former tenants and previous owners are full of good information on the condition of the structure, roof, if there are flooding or drainage problems, etc. It’s your broker’s job to get the most information possible so you can make an educated decision.

How often do environmental issues come up? What do you do about them?

They were a big deal from around 1998 to 2005, then people learned how to handle them. Recently, they are starting to come up more.

When you buy a building today, your lender requires a Phase I environmental site assessment, which is basically research and a walk through. If that’s clean, you’re fine. Otherwise, you’ll need a Phase II report, which includes physical testing.

Sellers should clean up obvious environmental concerns, such as barrels or oil, to avoid buyer concern. If there are problems, the buyer and seller, and their brokers and the environmental company, need to figure out how to address them. Usually the seller pays for cleanup, which can be costly.

If it’s too expensive to clean up, but the buyer really wants the building and the property doesn’t require Environmental Protection Agency cleanup, consider a long-term lease. The buyer/tenant gets use of the property, while the seller puts off the cleanup.

What about boundaries and access issues?

When you buy commercial real estate, get an American Land Title Association survey, which shows just about everything, including property lines, the building, sidewalks, curbs, driveways, big trees, parking spaces, fences, encroachments, easements, etc. It also identifies all neighboring properties.

One problem may be a building that’s on a lot that’s too small. If trucks need to turn around in someone else’s parking lot, for example, you can try to secure easements from neighbors.

With encroachments and easements, be aware of the situation. Let’s say you find the building is over the property line — legally it’s a problem, but physically it’s not. Then, you’d just need special title insurance. I have revamped easements to make properties more usable to finalize a deal.

How can you deal with inadequate utilities?

It’s usually a case of not enough electrical power, no gas or a gas line that’s too small. It’s also vital to calculate your future needs, so you only address this once.

Electrical issues are problematic, and expensive to upgrade. In Cuyahoga County, even discovering the cost is complicated, and takes time and persistence. A new transformer and wire may cost $50,000 to $300,000, or more.

Gas is cheaper to upgrade and more straightforward. After you identify your gas needs, the gas company will determine where it’s best to upgrade the system and what it will take to do it.

What do you tell a seller who’s building is in rough condition?

You only get one chance to make a first impression on a buyer. Clean and fix issues that are immediate turnoffs. A well maintained building adds value. Your broker should make suggestions to improve value that will provide a positive return.

Simon Caplan, SIOR, is a principal at CRESCO Real Estate. Reach him at (216) 525-1472 or [email protected].